3 Things to Loathe About Gulf Keystone Petroleum

Do these three things make Gulf Keystone Petroleum a poor investment?

LONDON -- There are things to love and loathe about most companies. Today, I'm going to tell you about three things to loathe about independent oil and gas explorer Gulf Keystone Petroleum(LSE:GKP).

I'll also be asking whether these negative factors make Gulf Keystone a poor investment today.

Director payGulf Keystone may be listed on AIM but it isn't a tiny tin-pot company. At a share price of 188 pence the market capitalization is some £1.6 billion. But does that mean its leading director deserves to be more handsomely rewarded than the directors of the world's oil super-majors?

Gulf Keystone is a loss-making company (a pre-tax loss of more than $90 million over the last two years alone) and pays no dividend.

Top FTSE 100 oil company Royal Dutch Shell is worth around $140 billion, and has produced a pre-tax profit of more than $100 billion over the last two years as well as paying out more than $10 billion in dividends.

The table below shows the total remuneration packages of Todd Kozel, Gulf Keystone's chairman and CEO, and the packages of Shell's leading directors.

2010

2011

Todd Kozel (Chairman & CEO Gulf Keystone)

$10.0m

$22.2m

Peter Voser (CEO Shell)

$7.1m

$7.2m

Jorma Ollila (Chairman Shell)

$1.0m

$1.1m

Political riskGulf Keystone's operations are in the autonomous Kurdish region of Iraq. Kurdish ministers are engaged in a turf war with the central government in Baghdad over who has authority over oil exports from the region and how to divvy up the proceeds.

The Kurds have been bypassing the federal infrastructure and building economic relations with Turkey, heightening fears of violence, instability and disintegration.

Court battleGulf Keystone is locked in a court battle with Excalibur Ventures, a former advisor to the company during its move into Kurdistan. Excalibur claims it was cheated out of a 30% interest in Gulf Keystone's multi-billion-barrel oil assets.

Legal proceedings have been dragging on since 2010. The high court case, which Gulf Keystone is confident of winning, had been expected to be concluded by now, but it could be June or beyond before completion of the judgement.

The case has been seen as an obstacle to Gulf Keystone moving from AIM to London's main-market FTSE 250 and a barrier to any takeover bid. The latter would certainly be the quickest scenario -- and perhaps the likeliest -- for shareholders to get a return on their investment.

A poor investment?There has been some progress on the political situation in Iraq in recent months, while the court battle with Excalibur is reaching its endgame. Continuing positive newsflow on the former and the resolution of the latter could pave the way for a bid for Gulf Keystone.

As for Todd Kozel's extraordinary remuneration, I don't suppose shareholders will be too concerned if he is able to unlock the value of the company's undoubtedly rich assets. Gulf Keystone's shares rocketed to 465 pence on whisper of a bid last year -- two-and-a-half times the current price.

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